You would like to know the beta of debt for KT Industries.The value of KT's outstanding equity is $50 million,and you have estimated its beta to be 1.62.You cannot,however,find enough market data to estimate the beta of its debt,so you decide to use the Black-Scholes formula to find an approximate value for the debt.KT has a five year zero coupon bond outstanding with a market value of $80 million.If the estimated D from the Black-Scholes model is .60,then the beta for KT's debt is closest to:
A) 1.00
B) 0.59
C) 0.90
D) 2.70

Question

Quizplus · Accepted Answer

B) First we need to solve for the unlevered beta: b_E = D 11ea7e5a_6e87_c7ee_9a0a_89c250e247d6_TB1623_11 b_U = D 11ea7e5a_6e87_c7ef_9a0a_01f66627d4dc_TB1623_11 b_U b_U₌ 11ea7e5a_6e87_c7f0_9a0a_c111dd04cacb_TB1623_11 ₌ 11ea7e5a_6e87_ef01_9a0a_b7a2e31ef9a5_TB1623_11 _{= .90} b_D = (1 - D)(1 + E / D)b_U = (1 - .60)(1 + 50 / 80)(.90) = .585

You Would Like to Know the Beta of Debt for KT